What is an LLC?
Generally, an LLC is a type of business that is separate from the owners for tax and legal purposes. An LLC allows you to protect your personal assets from any liability your company may incur. If there’s a judgment against your company, you don’t have to worry about your personal property. They also offer great tax benefits.
Once you start trading fulltime as a career, you’ll then be considered a sole proprietor (self employed) under the tax code. If you’re an employee, the employer will pay 50 percent of your Medicare and social security taxes. If you’re self-employed, you have to take care of all your taxes yourself.
Under a sole proprietorship, all business profits and losses are reported on your personal tax return. You’ll report these on the Schedule C form, which you’ll submit to the IRS attached to Form 1040
All your business income is taxable, even money that you’ve set aside into a business savings account or investment fund.
Sole proprietors are taxed before deductions and expenses while corporations are taxed on what’s left after deductions and expenses.
Sole proprietors are also at a higher risk of being audited.
The corporation pays income tax on earnings, and its owners, also called shareholders, pay some personal income tax on the amounts they receive as well. Many small businesses choose to pay taxes as S corporations instead. An S corporation doesn’t pay corporate income tax, and its shareholders report the company’s income on their personal returns.
Owners of an LLC can take advantage of limited liability, like the owners of a corporation. LLCs can also pass through profits to the owners, so they’re taxed at the lower individual rate.
LLC’s can choose to be taxed 3 different ways – As an S Corp, C Corp, or Sole- Proprietor
I suggest setting up an LLC which is taxed as an S-Corp.
An S corporation is similar to an LLC in that its federal tax status is pass-through, and the taxable income or losses fall on the owners or investors, based on their ownership percentage
This allows you to avoid double taxation.
By filing as an S corporation you are able to pay yourself a “Fair salary” on which you will pay social security and medicare taxes. The rest of the profits can be classified under something called dividends which are paid out to share holders.
Income from a corporation is treated as a dividend rather than earnings. That means dividend recipients don’t have to pay Social Security and Medicare taxes on that income. The owner of an S corporation can let some of their business profits pass through as earnings. Meanwhile, other profits pay out as dividends that are free of self-employment tax.
For example, Say you are a single member LLC (seen as self-employed) that earns $100,000 in net income. All $100,000 will pass through to you as self-employment income. In addition to income taxes, you’ll owe self-employment tax of $15,300, or 15.3%.
If you have elected to be taxed as an S corporation, you might have $50,000 pass through as earnings and $50,000 distributed as dividends. Then you’d owe just $7,650 in self-employment tax, for a tax savings of $7,650.
On top of this, businesses are able to take far more deductions than a trader filing as self-employed.